After the decision of the Supreme Court of India in the Nestle case, Switzerland has adopted a unilateral stand. It has canceled the ‘Most Friendly Nation’ or MFN status given to India under the Double Taxation Avoidance Agreement or DTAA treaty.
This move by Switzerland marks a significant change in the dynamics of the bilateral treaty and will result in a major impact on Indian companies operating in Switzerland as well as Swiss investments in India.
In its official statement on December 11, the Swiss Finance Department named the Supreme Court of India and cited its 2023 judgment as the reason for the decision to remove India’s MFN status. The Supreme Court in its order had said that when a country joins the OECD, the MFN clause does not automatically apply between two countries, especially if the Indian government has already entered into a pre-tax agreement with that country before joining the grouping. Have made a treaty.
OECD or Organization for Economic Co-operation and Development was established in 1961 and is headquartered in Paris. It calls itself a platform and knowledge center for best practices in data, analytics and public policy to build stronger, fairer and cleaner societies – helping shape better policies for a better life. It works closely with policy makers, stakeholders and citizens to set evidence-based international standards and find solutions to social, economic and environmental challenges.
case history
India had signed tax agreements with Lithuania and Colombia, under which tax rates on certain types of income were lower than those offered to OECD countries. Later both countries joined OECD.
Under the OECD, the effect of the MFN clause is that a country obliges itself in relation to offering ‘more favourable’ tax treatment to its treaty partner.
Switzerland held that the accession of Colombia and Lithuania to the OECD meant that the 5 per cent rate for dividends would be applicable under the MFN clause of the India-Switzerland tax treaty and not the 10 per cent rate mentioned therein.
But the Supreme Court decision meant something else – that when a country joins the OECD the MFN clause between two countries does not automatically apply, and the former tax treaty is given priority, as long as the MFN clause is in place. Not specifically mentioned in the ‘Notification’. With Section 90 of the Income Tax Act.
What does this mean for the Nestlé case?
In 2021, the Delhi High Court, while hearing the case against Nestlé, upheld the applicability of the remaining tax rates taking into account the MFN clause under the double taxation avoidance agreement, according to a statement from Switzerland’s Finance Department. This was in line with the way Switzerland had interpreted it.
However, in a judgment dated October 19, 2023, the Supreme Court overturned the High Court decision and held that, the applicability of the MFN clause was not automatically triggered. The top court ruled that the MFN clause “does not directly apply in the absence of ‘notification’ as per section 90 of the Income Tax Act” – a decision that affected Nestlé and in turn went against Switzerland’s expectation.
Switzerland’s response
Switzerland has now unilaterally revoked India’s MFN status and directly attributed its decision to the “Indian Supreme Court”.
This means that from January 1, 2025, Switzerland will impose 10 per cent tax (instead of the current 5 per cent) on dividends payable to Indian tax residents and entities who claim refund for Swiss withholding tax and to Swiss tax residents. Which foreigners claim. tax credits.
The Swiss Finance Department issued a statement in which it announced it “suspended the application of the MFN clause of the Protocol to the Agreement between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on income.”
The statement cited “a 2023 judgment of the Indian Supreme Court in a case related to Nestlé” for the decision to withdraw the MFN status.
What do experts say
Some see Switzerland’s move as a measure of retaliation for the Supreme Court decision, while others see it as a measure of reciprocity.
Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala described Switzerland’s move as unilateral and said, “This suspension may lead to increased tax liabilities for Indian entities operating in Switzerland, which have to navigate international tax treaties in an emerging global scenario.” “highlights the complexities of.”
“It also underlines the need to align treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, uniformity and consistency in the international tax framework,” Mr Jhunjhunwala told news agency Press Trust of India.
AKM Global Tax Partner, Amit Maheshwari said that “the main reason behind the decision to withdraw MFN is reciprocity, which ensures that taxpayers are treated equally and fairly in both countries.”
“The Swiss authorities announced in August 2021 that based on the MFN clause between Switzerland and India, the tax rate on dividends from eligible shareholdings will be reduced from 10 per cent to 5 per cent, with retrospective effect from July 5, 2018 However, this was later refuted by the Supreme Court judgment in 2023,” Mr Maheshwari told PTI.
He said “This may impact Swiss investments in India as dividends will now be subject to higher withholding tax and income earned on or after January 1, 2025, will be taxed at the rates provided in the original double taxation treaty between Switzerland and India.” Can be imposed.” “Regardless of the MFN clause.”
Kumaramangalam Vijay, partner, JSA Advocates & Solicitors, said, “This will particularly impact Indian companies with ODI (foreign direct investment) structure with subsidiaries in Switzerland by increasing the Swiss withholding tax on dividends from 5 per cent from January 1, 2025. Will do 10 percent.”
(Inputs from PTI)
